The budgeting technique has recently been revived by private equity firm 3G Capital Partners as part of the firm's strategy to slash costs, according to the Wall Street Journal. Pyhrr developed zero-based budgeting between and when he was working as a controller for Dallas-based Texas Instruments.
While ZBB has been around for decades, it is making a resurgence in popularity for setting marketing budgets and therefore we have included further references and resources on the impact of ZBB on Bottom Up Budgeting.
With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.
There are two basic approaches to developing a budget: Top down — This is where you develop or set the total or top budget and then break it down into the component parts within that budget. Bottom up — This is where you start with a list or plan or schedule of the things you want to do and then cost it up to get the total budget.
But which is the best way of developing a budget? Well it depends on a number of factors, but for advertising and marketing I want to share a few examples of the different approaches and then let you decide.
This had been going on for as long Kpk output based budgeting anyone could remember. But in this particular year the actual advertising budget and the corresponding scope of work had effectively decreased, and yet the agency was again maintaining an increase.
The marketing director was unsure of the reason for the increase, but the agency was able to show that each year the number of resources required excel spread sheets from timesheets. We took a bottom up approach, taking the scope of work for the previous year and the proposed scope of work for the coming year and calculated the resources required across account management, strategy, creative and production.
The agency had basically trained the client to accept a cost of living plus adjustment year on year as a standard practice, which helped the agency with their budget predictions to head office. No matter what the scope of work, the agency was taking a top down approach — what was spent with them last year, plus a suitable increase.
This approach is more common than you may think, as it plays to the growth expectations of the agencies and is easy to justify where the retainer is linked to resources only and not to what those resources are producing. Bottom up budgeting — marketer style The financial services marketing team developed their marketing plan with the business as part of the annual planning in the three months leading up to the end of the financial year and the approval of the budgets.
Once the marketing plan was in place, the marketers were using a Zero Based Budgeting ZBB approach and provided the plan to the agency for their input on the cost of the various elements, including media spend, production and fees.
They would then use these costs to calculate the budget required for the year. This appears on the surface to be completely reasonable. But the fact was that the agency fees were developed without the details of the actual task being defined.
Because of the uncertainty, the agency pricing was significantly buffered, to cover unseen contingencies in each job. When you then added these up, the additive effect became a multiplier effect adding to the overall cost.
The budget was calculated and presented for approval. There was the inevitable pressure from the business to reduce the calculated budget, but it was simply trimming the edges as the agency was hesitant to cut too deeply into their contingencies.
The part that was missing from the ZBB approach was that the individual agency cost elements were never considered against the value they represented to the marketing budget.
This would have gone someway to limit the contingencies within the budget estimates. After the first year we were engaged to review the agency fees and the production costs in particular. But the bottom up approach meant that the incremental buffers in the individual parts multiplied to become particularly inefficient.
In the following years we developed a value pricing or output based agency fee model that allowed the marketers to translate their marketing plan into an agency budget using a bottom up or ZBB approach without the agency providing a estimate of costs.
If you are still unsure of the bottom up or ZBB approach, we have created a Golden Minute video here that explains this in plain language. Top down budgeting — marketer style An automotive client was struggling with the budgets for their models that had smaller sales volumes.
This meant that their high volume models had huge budgets, compared to some of the other smaller selling or lower margin models. So, increasingly, the brand team on these smaller models with the lower budgets were limited in their advertising options.
This situation was exacerbated by the fact that the agency was working with a pricing model based on the assumption that an output was an output, no matter what the overall budget.
It meant that the smaller models quickly could not afford television, still one of the fastest ways to build awareness. In a conversation with the marketers, we discussed the possibility of having a tiered approach to their agency costs.
Looking at the typical budgets for the various models, we identified three tiers or brands of budgeting. Against each of these we then developed a new tiered-approach to the agency budgets and fees to take into consideration the total level of investment for the model based on the top down approach.
For the agency it set new budget expectations and the brand team and the agency continued to live up to and deliver the quality and performance expectation. Bottom up budgeting — agency style Most agencies will use the bottom up approach to cost the production of a campaign and this approach is increasingly popular in setting the retainer or agency fees based on the scope of work.
But there are situations caused by this bottom up approach which can have a negative impact on the overall budget. This is because it provides an incentive to do more, when often it is more important and of more value to do more of the things that work and much less of those that do not.
But more on that another time A beverages company was struggling with budget over-runs across most of their brands.Output based budgeting tool.
With output budgeting you can see the effect on the budget and cost objects when quantities change. ABC Focus is an output budgeting tool which enables activities and their cost drivers to be identified and measured.
Home» FB Network Resources» Results Based Management» Results Based Budgeting Download Results Based Budgeting - An Overview benjaminpohle.com Mechanism. Finance & Budget Network. Last updated.
15/06/ Overview of the work done for the FB network in the RBB area and concluded in Because budget formats “establish the rules by which the budgeting game is played (the decision rules)” and also “create the standards by which success is measured (rules of evidence),” formats are important to public budgeting.
Zero-based budgeting is a system that requires all departments to defend their programs and.
Performance-Based Budgeting Approach Public Financial Management - GMGF Page 26 Type of Budget and Their Performance on Economy Performance-based budgeting is a system approach in budgeting, linkages between funding and expected performance, as well as attention to efficiency in the achievement of such performance.
Zero-based budgeting is the antithesis of the incremental approach. Popularized in the s, zero-based budgets operate on the premise that the amount a company budgeted for a line item in one year has little to do with what it should be budgeting in future years.
The budget for A/E basic services is based on the MACC plus construction contingency as reflected in the Capital Budgeting System (CBS) and the updated cost estimating form (C).
The negotiated fee for A/E basic services should be based on the MACC only as shown in Architect/Engineer Fees Guidelines for Public Works Building Projects.